How can social dilemmas be resolved

We have already mentioned a situation in which it is definitely untrue—driving on the right or on the left. If others drive on the right, your best response is to drive on the right too. If they drive on the left, your best response is to also drive on the left. To predict what we will observe, even when there is no dominant strategy equilibrium, we need to extend our understanding of game theory.

In the US, everyone driving on the right is an equilibrium, in the sense that no one would want to change their strategy given what others are doing. In game theory, if everyone is playing their best response to the strategies of everyone else, these strategies are termed a Nash equilibrium NE. In Japan, though, driving on the left is a Nash equilibrium. Many economic interactions do not have dominant strategy equilibria, but if we can find a Nash equilibrium, it gives us a prediction of what we should observe.

We should expect to see all players doing the best they can, given what others are doing. Even in simple economic problems, there may be more than one Nash equilibrium as in the driving game. Suppose that, when Bala and Anil choose their crops, the payoffs are now as shown in Figure 2. This is different from the invisible hand game. If the two farmers produce the same crop, there is now such a large fall in price that it is better for each to specialize, even in the crop they are less suited to grow.

Follow the steps in Figure 2. We place a dot in the bottom left-hand cell. Place a dot in the top right-hand cell. Notice that Anil does not have a dominant strategy. If Anil chooses Cassava and Bala chooses Rice, both are playing best responses a dot and a circle coincide.

This is a Nash equilibrium. If Anil chooses Rice and Bala chooses Cassava, then both are playing best responses, so this is also a Nash equilibrium, but the payoffs are higher in the other equilibrium.

So far, we have seen examples in which, even though players act independently, they can achieve an outcome that is good for all of them:.

In these cases, the players could do better if they could reach an agreement. People commonly try to do just this—they resort to negotiation to solve their economic and social problems. For example, international negotiation resulted in the Montreal Protocol, mentioned earlier, through which countries agreed to eliminate the use of chlorofluorocarbons CFCs in order to avoid a harmful outcome the destruction of the ozone layer.

But negotiation does not always succeed, sometimes because of conflicts of interest over how the mutual gains of cooperation will be shared. The success of the Montreal Protocol in reducing the use of CFCs contrasts with the relative failure of the Kyoto Protocol and of the Copenhagen climate change summit. The reasons are partly scientific. The alternative technologies to CFCs were well developed and the benefits relative to costs for large industrial countries, such as the US, were much clearer and larger than in the case of greenhouse gas emissions.

But one of the obstacles to agreement at the Copenhagen summit in was over how to share the costs and benefits of limiting emissions between developed and developing countries.

The tools of game theory can help explain these different outcomes. Whether you drive on the right or the left can be represented as a game with two Nash equilibria—everybody left, or everybody right. Which it will be is not a matter of conflict in itself, as long as everyone you are driving towards has made the same decision as you. But in the division of labour game in Figure 2. Not necessarily. Remember, we are assuming that they take their decisions independently, without coordinating.

Bala would have no reason to switch to what he is good at—growing rice. The example makes an important point. Later in the course, we will see that this model helps explain phenomena like an economy getting stuck in a situation with low investment and high unemployment. John Nash — completed his doctoral thesis at Princeton University at the age of It was just 27 pages long, yet it advanced game theory which was a little-known branch of economics back then in ways that led to a dramatic transformation of the subject.

His answer, now known as a Nash equilibrium , is a collection of strategies, one for each player, such that if these strategies were to be publicly revealed, no player would regret his or her own choice.

That is, if all players choose strategies that are consistent with a Nash equilibrium, then nobody can gain by unilaterally switching to a different strategy. In addition, he made pioneering contributions to other areas of mathematics, for which he was awarded the prestigious Abel Prize. Nash would go on to share the Nobel Prize for his work. Nash originally wanted to be an electrical engineer like his father and studied mathematics as an undergraduate at Carnegie Tech now Carnegie-Mellon University.

An elective course in International Economics stirred his interest in strategic interactions, which eventually led to his breakthrough. For much of his life, Nash suffered from mental illness that required hospitalization.

He experienced hallucinations caused by schizophrenia that began in The story of his insights and illness are told in the book made into a film starring Russell Crowe , A Beautiful Mind.

So far, the problem facing our players has been to avoid getting trapped in an equilibrium that is worse for both, or all players. They experience mutual gains if they can cooperate and find a way to move to a different, mutually preferred outcome. But players face other problems. When there is more than one equilibrium in a game, a conflict of interest occurs if players in a game would prefer different Nash equilibria.

This fact underlies one of the key lessons of economics—when people interact, they may each benefit compared to what they could have had acting singly, but they will also face a conflict over who benefits more. To see this, consider the case of Astrid and Bettina, two software engineers who are working on a project for which they will be paid. Astrid wants to write in Java because she is better at writing Java code. While this is a joint project with Bettina, her pay will be partly based on how many lines of code were written by her.

In other words, there are two Nash equilibria. In one, both choose Java. Can we say which of these two equilibria is more likely to occur?

Anthony loves going to the opera while Becky loves watching football. Assume that they can only choose one activity. Based on this information, which of the following statements is correct? Here is an example, starting with a little background. This is the blunt beginning of the executive summary of the Stern Review on the Economics of Climate Change , released in The British Chancellor of the Exchequer finance minister commissioned a group of economists, led by Nicholas now Lord Stern, the former Chief Economist of the World Bank, to assess the evidence for climate change and to try to understand its economic implications.

The Stern Review concludes that the benefits of early action to slow climate change will outweigh the costs of neglecting the issue. National governments disagree on the policies that should be adopted. Many nations in the developed world are pressing for strict global controls on carbon emissions; others have resisted these measures. Think of the problem as a game between two countries, China and the US, considered as if each were a single individual.

We do this to show that, depending on how the game is structured and the objectives of the participants, the outcomes may be very different. Each country has two possible strategies for addressing global carbon emissions: Restrict taking measures to reduce emissions, for example by taxing the use of fossil fuels and BAU.

This is called an ordinal scale because all that matters is the order—whether one outcome is better than the other—and not by how much it is better. The best for each is to continue with BAU and let the other one Restrict. The only way to moderate climate change significantly is for both to Restrict. Therefore, in the climate change version of the hawk—dove game, Doves Restrict and Hawks continue with Business as usual.

The conflict of interest here is that each country does better if it plays Hawk while the other plays Dove. One possible set of numerical payoffs for this game is illustrated in Figure 2. We work through the game to find the predicted outcome. First, consider China, the row player. It is clear from this that China does not have a dominant strategy: what is best for China depends on what the US does. By inspecting the payoff matrix, we can see that the game is symmetric.

The circles will be in the bottom left and top right cells. If the first country could commit itself to BAU so that the second country was certain that it would not consider any other strategy, then the second country would play Restrict Restrict is a best response to BAU, to avoid catastrophe. But the same is true of the other country. We can see that negotiations are bound to be difficult, since each country would prefer the other to take the lead on restricting carbon emissions. Among real countries not the hypothetical players in our game the situation is of course more complex—virtually all countries in the world are involved in the negotiations.

The payoffs may look different to these varied players. On a per-capita basis, however, China produced less than half the emissions that the US did, and India less than an eighth. The game represents the idea that no one wants to see catastrophic climate change, but each is waiting in order to see if others will move first. How could the global social dilemma of climate change policy, as represented in this game, be solved? Could the governments of the world simply prohibit or severely limit emissions that contribute to the problem of climate change?

This would amount to changing the game by altering available strategies by making BAU illegal. But who would enforce this law? There is no world government that could take a government that violated the law to court and lock up its head of state! If the climate change social dilemma is to be addressed, Restrict must be in the interests of each of the parties. If the payoffs China gets for playing Restrict were higher, when that is what the US is doing, then Restrict, Restrict might become an equilibrium.

Indeed, in the eyes of many climate change scientists and concerned citizens, the aim of global environmental policy is to change the game so that Restrict, Restrict becomes a Nash equilibrium. A number of mechanisms, aided by policy, could accomplish this:. Almost all countries also submitted individual plans for cutting emissions. Of course, there is no way that the Paris Agreement could be enforced. Although these plans are not yet consistent with this temperature stabilization goal, the Paris Agreement is widely seen as an important step in the right direction.

It should:. Social dilemmas are unavoidable because of a basic fact of human existence: we are social animals. We interact directly and indirectly with thousands of people in a day. Life as a hermit would be impoverished by comparison. As a practical matter, human life in isolation would be impossible. Paul Seabright. But our social nature poses an enormous challenge—how can we organize our interactions in such a way that the outcomes are acceptable—or even, by our own standards—good?

Although there are vast mutual gains to be had through interacting with others, there are also substantial conflicts among us about how these benefits will be shared. In the eyes of many people, a desirable society is one that addresses the unavoidable social dilemmas that face us and also distributes the benefits and costs associated with our social interactions in a fair way.

Economics has an important role to play in meeting these objectives. Economics is the study of how people interact with each other and with their natural surroundings in producing their livelihoods, and how this changes over time. Therefore, it is about:. In Figure 1. Firms combine labour with structures and equipment to produce goods and services that are used by households and other firms.

The economy of households and firms depends on a healthy biosphere and stable physical environment. Production of goods and services also takes place within households, although, unlike firms, households may not sell their outputs in the market.

In addition to producing goods and services, households are also producing people—the next generation of the labour force. The labour of parents, caregivers, and others is combined with structures for example, your home , and equipment for example, the oven in that home to reproduce and raise the future labour force working in firms and the people who will work and reproduce in the households of the future.

All of this takes place as part of a biological and physical system in which firms and households make use of our natural surroundings and resources, ranging from fossil fuels or renewable energy to the air we breathe.

In the process, households and firms transform nature by using its resources, but also by producing inputs to nature. Currently, some of the most important of these inputs are the greenhouse gases, which contribute to climate change problems. Humans have always relied on their environment—the physical environment and the biosphere, which is the collection of all forms of life on earth—for the resources they need to live and produce their livelihoods.

The environment provides essentials for life, such as air, water, and food. It also provides the raw materials that we use in the production of other goods—such as wood, metals, and oil. Our economy is shaped by millions of direct and indirect interactions among people. These social interactions offer opportunities for mutual gains, but conflicts frequently arise over how these gains should be distributed.

The individual pursuit of self-interest may lead to socially beneficial outcomes. These social dilemmas occur when people do not take into account the effects of their actions on others, called external effects or externalities. And they give rise to the problem of free riding , where people benefit from the contributions of others to a public good or some other cooperative project without contributing themselves.

We find that, in addition to the self-interest exemplified by homo economicus , social preferences such as altruism , reciprocity , and inequality aversion and social norms also influence how we behave.

We have used game theory to study strategic interactions among people whose actions jointly determine the outcome. A game specifies the players, their feasible strategies , their information, and the possible payoffs.

Characteristics of a game include whether it is a one-shot or a repeated game. We visualize the possible outcomes in a payoff matrix , where each entry describes the result of a hypothetical situation in which the players choose certain actions. The dot-and-circle method can help identify probable outcomes of the game.

Helpful concepts that have aided our analysis of games include that of a best response and a dominant strategy. We have seen that multiple Nash equilibria mutual best responses may occur, and that a dominant strategy equilibrium is a particularly simple example of a Nash equilibrium. The issues discussed in this unit have helped us define economics as the study of how people interact with each other and with their natural surroundings to produce their livelihoods. In Unit 2, we discussed how we could use experiments to investigate how people might behave in particular situations.

Although we cannot perfectly predict how people would actually behave, the controlled environment of experiments allow us to isolate the effects of a given change and identify specific reasons for the observed behaviour. If we kept all conditions the same and only changed one thing, then we can be more certain that any differences we observe are due to that one change.

We will first learn more about how experimental data can be collected by playing a public goods game to collect our own data. Then we will look at ways to describe and analyse the experimental data from Figure 2. Go to Doing Economics Empirical Project 2 to work on this problem. Garrett Hardin. Elinor Ostrom. Environment: Science and Policy for Sustainable Development 50 4 : pp. In Fables , retold by Joseph Jacobs. XVII, 1. The Harvard Classics. New York: P.

Journal of Economic Perspectives 14 3 : pp. Colin Camerer and Ernst Fehr. Oxford: Oxford University Press. Armin Falk and James J. Steven D. Levitt and John A. Journal of Economic Perspectives 21 2 : pp. Francis Ysidro Edgeworth. A Little Book in C Major.

Sylvia Nasar. This ebook is developed by the CORE project. More information and additional resources for learning and teaching can be found at www. Economy, Society, and Public Policy. We use game theory to show why the pursuit of self-interest can sometimes lead to results that are considered good by all participants, or outcomes that none of the participants would prefer. Social dilemmas like antibiotic misuse or environmental degradation occur when someone does not fully take account of the effects of their decisions on others.

We collect data from experiments and use other evidence to show that both self-interest and social preferences—including a concern for others, feelings of reciprocity, and a preference for fairness—are all important motives that explain how people interact.

We illustrate how the tools developed in this unit can be applied to a range of economic situations, including the global challenge of climate change. Doctors recognize that leaving the allocation of antibiotics to the market has damaging consequences. In these situations, people often use antibiotics when other treatments would be better. Even when antibiotics are appropriate, patients often stop taking the antibiotics to save money, when they feel a little better.

These are exactly the patterns of use that will produce antibiotic-resistant pathogens. It is external because it is not included in the decision-making process of the person taking the action. Positive effects refer to benefits, and negative effects to costs, that are experienced by others. Also known as: externality. See also: incomplete contract , market failure , external benefit , external cost.

See also: social dilemma. There is nothing new about social dilemmas. We have been facing them since prehistory. Also known as: other-regarding preferences.

Social Preferences: Caring about others preference Pro-and-con evaluations of the possible outcomes of the actions we may take that form the basis by which we decide on a course of action. To understand social dilemmas, and how they might be avoided, we distinguish between two classes of preferences: Self-interested preferences: When a person with self-interested preferences chooses to take some action, she only takes account of how it affects her personally, ignoring the effects on others.

Social preferences: A person with these preferences cares not only about how her action affects her personally, but also about how it affects other people. Cooperating with others to achieve common objectives: These may be a safer more pleasant neighbourhood, or demonstrating for a political cause, even when you would enjoy the benefits whether you participated or not. Social institutions: The rules of the game Social preferences are not the only way that societies resolve social dilemmas.

Question 2. Social dilemmas occur when people do not take adequate account of the effects of their decisions on others. The fact that an issue is discussed on social media does not make it a social dilemma. Caring for the elderly is an issue that society the government or individuals must address, but it is not a social dilemma because it does not arise from people not taking adequate account of the effects of their decisions on others.

But what if everyone at the table realized the same thing? This is a very simple example but you can map this to the business word by thinking about healthcare and insurance. I came across an excellent paper[1] by Robyn Dawes and David Messick, which takes a closer look at social dilemmas.

In the case of the public good, one strategy that has been employed is to create a moral sense of duty to support it—for instance, the public television station that one watches.

The final illustration, the shared meal and its more serious counterparts, requires yet another approach. Here there is no hierarchy, as in the organizational example, that can be relied upon to solve the problem. With the shared meal, all the diners need to be aware of the temptation that they have and there need to be mutually agreed-upon limits to constrain the diners. Alternatively, the rule needs to be changed so that everyone pays for what they ordered.

The latter arrangement creates responsibility in that all know that they will pay for what they order. Such voluntary arrangements may be difficult to arrange in some cases. Babcock, L. Gender differences in the propensity to initiate negotiations. Mahwah, NJ: Lawrence Erlbaum.

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